A guide to risk management in manufacturing

The manufacturing industry is in the midst of a volatile period. Manufacturers must overcome risks like tariffs, supply chain disruptions, international macroeconomic pressures from the wars in Iran and Ukraine, AI growing pains and more — all while protecting profitability.

Implementing an effective risk management strategy can help your manufacturing business navigate today’s risks. Keep reading to learn more, plus how to assess and mitigate your own top risks.

Why risk management matters for manufacturers

Manufacturing businesses are currently operating in a high-VUCA environment. The acronym, which stands for volatility, uncertainty, complexity and ambiguity, describes many of the key pressures manufacturing CFOs and COOs face as they try to maintain smooth operations and combat shrinking margins.

Risk management is a way to bring a little stability to that high-VUCA environment. There’s so much you can’t control — tariffs, international trade, wars, government policies — but by focusing on what you can do within your own four walls, you can still manage your risks enough to protect your value and operating income.

This often starts with a mindset shift. If you’re willing to let go of your old ways of doing business and embrace changes like new technology or revamped processes, you’ll have taken a big first step towards making your business stronger and more adaptable.

What are the major risks facing manufacturers?

Manufacturers today face risks like supply chain concentration, workforce shortages and cybersecurity threats. Those risks are compounded by big-picture, geopolitical issues like tariffs and international conflicts, as well as the ongoing rise of AI.

Top risks for manufacturers include:

• Tariff risks: Most U.S. imports are now tariffed at between 10-50%, raising materials costs for many manufacturers while also putting additional cost pressures on consumers.
• Geopolitical risks: The wars in Iran and Ukraine have strained supply chains and caused price spikes for oil and other essential commodities.
• Workforce risks: Manufacturing’s perennial labor problem hasn’t gotten any easier, with both worker shortages and high labor costs continuing to pressure businesses.
• Supply chain risks: Many manufacturers still put too many eggs in one basket, relying on overly concentrated supply chains with respect to both vendors and customers.
• AI risks: While AI can deliver significant benefits to manufacturers, the technology comes with major risks too, especially in areas like data privacy and shadow AI.
• Cybersecurity risks: Cybersecurity has increasingly gone from just an IT concern to a significant financial risk, as ransomware attacks or data breaches can lead to financial, operational and reputational harm.
• Shrinking margins: Rising costs on many fronts are cutting into margins, making it harder for manufacturers to get or stay profitable.
• Production risks: Depending on industry or process type, manufacturers also face production-specific risks around issues like safety and wasted open capacity.

How to assess manufacturing risk

Your manufacturing business may deal with many of the industrywide risks covered in this article, but it could also face others more specific to your region or niche within the industry. Conducting a manufacturing risk assessment can help you understand your unique risk environment and develop a strategy to mitigate it.

Here’s a practical risk assessment framework for manufacturers (a risk advisory firm can help you work through it):

1. Identify and document risks

Identify the risk areas and individual risks that could affect your business. This will likely include industrywide risks like tariffs or cybersecurity. Also consider factors more specific to your business, like a mission-critical employee who’s due to retire or production risks like food or chemical safety.

2. Assess the likelihood and impact of each risk

Once you have a list of risks, assess each risk based on likelihood and impact. You can rate each of these factors using a scale of low, medium or high.

3. Prioritize risk based on likelihood and impact

Prioritize your risks based on likelihood and impact, as well as your essential business objectives. For example, if supply chain disruptions are both high-likelihood and high-impact, that’s a risk you’ll want to tackle right away, while a low-likelihood, medium-impact risk will likely be much lower on your priorities list. Your C-suite should also discuss risk tolerance.

4. Identify existing controls and gaps

Assess the controls, policies and procedures you already have in place to mitigate your high-priority risks. This will also help you identify control gaps that need to be filled, like a lack of AI governance or an ineffective system for tracking tariff costs.

5. Develop risk mitigation strategies

Develop a risk management roadmap to tackle your top priority risks. This will typically include establishing new controls or policies to manage risk, as well as training, scenario planning and strategic steps like technology upgrades or inventory management changes.

6. Assign risk owners and accountability

To ensure your risk management roadmap actually gets implemented, assign owners to each action step. Creating a system of accountability, like regular reporting at the C-suite or board level, can also help drive follow-through.

7. Monitor and assess risk regularly

As you implement your risk management roadmap, continue to regularly monitor your risk environment and periodically reassess. Risks are constantly evolving, so your risk management strategy needs to be, too.

How can manufacturers mitigate business risks?

Implementing a risk management strategy can help manufacturing CFOs and COOs mitigate their top business risks. Depending on the results of your risk assessment, you may wish to consider strategies like:

Work with a risk management advisor

An advisory firm that works with manufacturers to manage risk and improve performance can help your business navigate today’s high-VUCA environment. Look to an advisor to conduct your risk assessment and help you implement internal controls, operational changes and strategic shifts to manage your risks.

Strengthen supply chain resilience

Diversify your supply chain to mitigate tariff and disruption risks. Start by mapping your supply chain and identifying possible alternatives for both sourcing and customers. You may also want to do a reshoring or nearshoring evaluation to determine if either could make sense for your business.

H3: Improve operational processes and controls

Running your business more efficiently can help protect your margins from surging costs. One idea: Implement production monitoring to get a clearer sense of how your production is performing on a day-to-day basis (you’ll get a dashboard showing red or green status for your machines) so you can establish a baseline to improve on. You can also use AI to make predictive maintenance recommendations to reduce your risk of machine downtime.

Strengthen your analytics

The more data you have, the better you understand how your business is performing. This applies to not just production line performance but also areas like costs, pricing, inventory and organizational performance — all of which can help you identify inefficiencies and understand how what happens in your plant impacts profitability.

Implement strong cybersecurity and AI controls

You need effective controls for cybersecurity, data protection and AI. This typically includes establishing technology governance, implementing ongoing cybersecurity training and taking steps to make your business more cyber resilient.

Improve financial forecasting and scenario planning

CFOs should take advantage of AI’s analytical capabilities to do extensive financial forecasting and evaluate the impact of various scenarios. Forecasting and scenario planning can help you to both understand potential risk areas and decide which to prioritize in your risk roadmap.

Regularly reassess risks and update controls and strategies

Don’t assume today’s risks are the same as tomorrows. Make risk management an ongoing, living practice that includes periodic reassessments and updates to your controls and strategies.

Stop putting off succession planning

Succession planning isn’t just about who will own the company 10 years from now. Engaging in a thoughtful succession planning process makes your whole business more stable by ensuring continuity of knowledge after a long-time employee retires, passing sales relationships from one generation to the next and giving employees a path to move up in the business.

Don’t ignore valuable tax opportunities

Manufacturers can often offset margin pressures using tax incentives. Depending on the circumstances, these may include R&D tax credits, bonus depreciation or qualified production property, state-level incentives and even sunsetting energy efficiency deductions like 179D that could still apply to plant upgrades you’ve already made.

Read More

• Can the qualified production property rule help your manufacturing firm reduce tax payments?
• Cybersecurity in manufacturing: Strategies to mitigate risk
• Manufacturing trends: What 456 leaders say about the industry today.